Installment Loans and Credit Scores Your credit ratings could also have an impact on your installment loan. Lenders consider your scores when deciding whether to offer you a loan. Your credit score may also influence interest rates and the terms offered to you. Installment credit is a loan that offers the borrower a fixed or finite amount of money over a specified period of time.
This way, the borrower knows in advance how many monthly payments or installments he will have to make and how much each monthly payment will be. Installment loans are popular for debt consolidation because they tend to offer lower interest rates than credit cards. For example, if you have multiple lines of credit card debt with an 18 percent APR, you can save money by transferring that debt to an installment loan with a 9 percent APR. That way you pay less interest and can focus on paying one fixed bill instead of several.
Lastly, if you get an installment loan to pay off credit cards, for example, your score may benefit. Switching Credit Card Debt to an Installment Loan Lowers Your Credit Utilization Ratio. Utilization is a concept of credit for the amount of your balance in relation to your limit. It is an important factor in your credit rating.
Switching debt to a personal installment loan can instantly reduce overall and card usage. For example, if you use a bank account to pay monthly bills for streaming service, phone, or utilities, those payments would traditionally not be considered in your credit score. Both factors contribute to credit score calculations, so losses in those areas may result in a temporarily lower score. The second most important determining factor in your credit score, just behind your payment history, is credit utilization, or the amount of revolving credit you use relative to your credit limit.
Payment history accounts for 35% of your FICO score, and on-time installment loan payments help build that record. Accredited lenders report on-time payments to at least one of the three major credit bureaus, Equifax, Experian and TransUnion. Lenders use different methods to evaluate your loan application and assign your rate, so it's worth comparing installment loans from multiple lenders. Applying for an installment loan often requires a rigorous credit check, which can temporarily lower your credit score by a few points.
Installment loans often have lower interest rates than credit cards and can be a much better option than payday loans, which tend to charge very high interest rates and fees. When you get a payday loan, you give the lender a postdated check to deposit on the next payday, or the lender may require authorization to directly withdraw the money from your bank account after you are paid. After you borrow the funds, you will need to repay the installment loan for a fixed period, which you and the lender will determine when you apply for the loan. Simply use the filters on this page to compare the latest personal loan offers from banks, credit unions and lenders online and then apply online.
Installment loans work differently than revolving credit you get with a credit card or home equity line of credit because you borrow all the funds at once. Because your balance is constantly changing, credit cards demonstrate how well you plan ahead and prepare for variable expenses. However, the loan is secured by the house, so there is a risk of foreclosure if you can't pay what you owe. Paying on time builds your credit history, and you'll have a good emergency fund by the time you finish repaying the loan.